Thursday, August 17, 2017

Retail Sales Back, But Not Consumers

The Mortgage Corner

It turns out consumers decided to shop again in July, as retail sales surged in all categories. This includes online sales these days, as retailers adapt to the new reality that one large store size doesn’t fit all. But it may be a one-time surge, as wages are barely rising above inflation, while major brick and mortar stores are disappearing, and factory discount outlets thrive.

Nonstore retailers, vehicle dealers, building materials stores lead the report -- all major categories. Secondary readings are all strong: up 0.5 percent ex-autos, up 0.5 percent ex-autos ex-gas, and up 0.6 percent for the control group. Annual sales had risen above 5 percent in January, then declined until this month. So it’s hard to know if consumers in fact feel more prosperous.


Target, for instance, is opening more than 100 ‘small-store’ outlets near universities and colleges that was announced at their second quarter earnings call. Target Chief Executive Brian Cornell said the retailer would be nearly doubling the number of small-format stores it has this year, with the ultimate goal of having more than 100 open for business over a three-year period. The plan is to have 30 in 2017, said Chief Operating Officer John Mulligan, with nine opening in July and four opening in the first quarter.
“While we’ve only been open a few weeks, our July openers have been particularly strong out of the gate and as Brian highlighted, the guest response has been phenomenal,” Mulligan said on the Wednesday call, according to a FactSet transcript. “For the seven smallest format stores that have been open for more than a year, we’re continuing to see sales productivity more than double the company average and these stores have been delivering high-single-digit comp increases so far in 2017.”
We reported earlier that most households aren’t earning enough income to do more than pay their bills, such is the record income inequality. The monthly reading for this measure did finally show some life in the prior week's employment report with an unadjusted 0.3 percent gain, but it will take a continued run of strength to level out the 2-year trend line which remains in a deep downslope, said Econoday.

So we remain doubtful this retail surge can continue given all the actual brick and mortar stores closed or about to close. Brokerage firm Credit Suisse said in a research report released earlier this month that it's possible more than 8,600 brick-and-mortar stores will close their doors in 2017.

For comparison, the report says 2,056 stores closed down in 2016 and 5,077 were shuttered in 2015. The worst year on record is 2008, when 6,163 stores shut down, due to onset of the Great Recession.

Why? Is it only Amazon online shopping? No, because consumer incomes are barely rising, as I said, they look for discounts everywhere, and brick and mortar stores with their higher overhead, can’t cut prices as much, and can’t offer the variety that Amazon offers.

Now we hear that Amazon also wants to compete on the ground. What next? It will probably be more like an Apple store that samples its services and directs customers to its online warehouses, also springing up everywhere. Who can match that kind of cost-cutting when workers’ stagnant wages and salaries mean they will continue to discount shop for bargains.

Guess what is missing that would boost economic growth? Infrastructure spending, and now that Big Business has walked away from President Trump’s business councils, and Prez Trump is dissing Senate Republican leaders, good luck on getting anything done!

Harlan Green © 2017

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Wednesday, August 16, 2017

Why the Greater Lawlessness?


We knew as far back as Nixon’s Watergate that the Republican party harbors a lawless tendency when it suits them. Why else would President Reagan engineer the illicit Iran contra arms deal with the Ayatollah Khomeini, or, President GW Bush invade Iraq when UN inspectors already knew Saddam Hussein had destroyed his weapons of mass destruction a decade earlier?

The lawlessness of Republicans’ hunger for power has now reached such a point that they have selected and continue to support a president who has lied and cheated his whole adult life; from Trump Casinos to Trump Towers, from stiffing bankers and his workers to cooking the books. This has been documented in many of the 3,500 plus lawsuits Trump has been involved in, and the reason he settled the Trump University lawsuits, one of which alleged he ran a fraudulent enterprise under RICO, the Racketeer Influenced and Corrupt Organizations Act.

The sins of Hillary and Bill Clinton pale, yet Republicans impeached Bill for lying about a sexual encounter and continue to hound Hillary over lost emails. So why aren’t they impeaching Donald Trump who hasn’t divested himself of his assets to avoid conflicts of interest and continues to profit and even solicit favors from foreign governments in direct violation of the constitution?

President Trump's current 34 percent Gallup popularity rating is testimony that his support is now only restricted to those that would support him, even if, ““I could stand in the middle of Fifth Avenue and shoot somebody, and I wouldn’t lose any voters,” said at a January 2016 Iowa campaign rally.

And now we have President Trump condoning the lawlessness of his neo-nazi and white nationalist supporters holding a torchlight parade in Charlottesville, Virginia, Jefferson’s hometown.

CNN commentator David Gergen, advisor to four presidents, chastised Trump yesterday in commenting on the Charlottesville riot and death of a counter-demonstrator. “He said he wants to bring love, not hatred to the country,” Gergen said. “Good. We need to deal with hatred, but he needs to deal with the hatred in his own heart if he wants to bring more love to the country.”

When will the Republican party stand up to such blatant lawlessness? Only when they can deal with the lawlessness in their own hearts. In selecting an autocrat to further their agenda, they are in effect saying freedom means anarchy, rather than living within a democracy of laws based on the world’s first constitution that guarantees equal rights for all of its citizens.

Harlan Green © 2017


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Tuesday, August 15, 2017

Why Aren't Wages Rising Faster?

Popular Economics Weekly

Everything should point to higher wages and salaries ahead for employees with a 4.3 percent unemployment rate and record corporate profits, but corporate profits go mainly to their executives and owners (and their stockholders) these days. The result is stagnant wages and household incomes.

Graph: Econoday

“Real", or inflation adjusted average hourly earnings slipped 2 tenths in July to a year-on-year 0.7 percent. This reading has been under the 1 percent line since October last year. The monthly reading for this measure did finally show some life in the prior week's employment report with an unadjusted 0.3 percent gain, but it will take a continued run of strength to level out the 2-year trend line which remains in a deep downslope, says Econoday.

It’s as if corporate bosses no longer are interested in maximizing their growth, which is the normal way to maximize profits. They have been successful in boosting profits, but mainly through financial engineering—that is, stock buybacks paid with borrowed money, or mergers and acquisitions that consolidate markets into fewer players.

This increases their monopoly powers to boost profits and resist employee calls for higher wages. It has helped to keep the stock market humming, but not the economic growth that should accompany such profits.

Wages in the United States increased 2.95 percent in May of 2017 over the same month in the previous year. But a better idea of healthy wage growth in the United States is a historical average of 6.26 percent from 1960 until 2017, reaching an all-time high of 13.77 percent in January of 1979 and a record low of -5.77 percent in March of 2009, according to Trading Economics.


This is what normal wage growth should look like, if workers were earning a living wage, and inflation was rising at a normal rate. The inflation rate in the United States averaged 3.28 percent from 1914 until 2017, and was 14 percent in 1980. Wages since then have been suppressed in the name of suppressing inflation, as employees’ bargaining power has been curtailed.

That’s why the national minimum wage is still $7.25 per hour, last raised in 2009, though some cities and states are beginning to raise it to $15 per hour, which is what economists calculate is the minimum living wage for a family of four. And that is just enough to cover what a household has to pay for housing, gas, food, clothing, and other everyday items.

But it’s an uphill battle when business interests rule the markets with little push back or bargaining power held by 80 percent of the workforce that are wage earners, and we wonder why so many refuse to return to work. So we shouldn’t wonder why U.S. labor productivity, which ultimately sets our standard of living, has remained so low of late. It increased at an average annual 2.5 percent from 1948-2007, but just 1.2 percent from 2010-14.

It’s also the reason the U.S. have the highest income inequality in the developed world. The U.S. ranks 106th of the 149 countries in income inequality as ranked by the CIA’s World Factbook with a Gini inequality index of developing countries like Peru and Cameroon. 

Harlan Green © 2017

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Friday, August 11, 2017

More Job Openings, Lower Inflation, Mean What?

Popular Economics Weekly

The job market continues to fluctuate, as job openings rose sharply in June to 6.163 million from 5.702 million in May. Hires, however, fell sharply, to 5.356 million from 5.459 million. This data set can be volatile but the underlying theme is a separation between openings and hiring, says Econoday, which rather than meaning full employment and higher inflation points to workers who refuse to return to work, unless employers will pay enough to entice them to return.

The number of unfilled jobs rose again to 807,000, whereas the unfilled total had fallen to 194,000 in May, and there were1 million openings the month before. See what I mean?

Graph: Econoday

There is really no inflation to speak of, in fact the looming danger is disinflation (meaning falling inflation), which can lead to outright deflation and falling prices. Economists don’t like falling prices because it could lead to a recession.

That hasn’t happened yet, but interest rates plunged again. The Fed’s preferred Personal Consumption index that measures overall prices is too low.
 

The main determinant of inflation is the cost of labor, which accounts for approximately two-thirds of labor costs. Though wages have risen slightly of late, it still can’t buck the 2.5 percent annual increase it’s been for years.

“At 4.3 percent unemployment, earnings in theory should be much higher, at least above 3 percent where many believe it needs to be before feeding into overall inflation,” said Econoday last week. “And overall inflation, tracked here by core PCE prices, hasn't been moving higher either, dipping to the 1.5 percent line.”

It is the meaning of disinflation, and a reason the Federal Reserve will be hesitant to raise their rate another 0.25 percent in their September FOMC meeting. The Prime Rate that controls revolving debt, and even equity line mortgages has already risen from 3.50 to 4.25 percent.

This is while long term Treasury yields continue to drop. The 10-year Treasury yield is now 2.2 percent, which is why the conforming 30-yr fixed rate is still at 3.50 percent for a 1 pt. origination fee. This is what is called a declining yield curve, which means less profits for banks, since they borrow money at a short-term rate, and lend it at longer term rates.

Consumer prices have risen an unadjusted 1.7 percent over the past 12 months, up slightly from 1.6 percent in June. But on a core basis (without food and energy price changes), which is watched more closely by Fed officials, consumer prices remained at a 1.7 percent annual rate, the same rate as in May and June.

So, we have all these job openings that far outnumber hirings, while consumers can’t or won’t push up prices because their incomes aren’t rising enough to boost product costs and so prices.

That is why there are so many unfilled jobs, and such low inflation. Producers would have to boost wages to attract more workers, and they haven’t done so to date. Why? It could be corporations are choosing to use record profits to overpay their executives and stockholders, in effect rewarding themselves, instead of growing their markets.
It's not what all corporations choose, of course, but we know the 7 million total of unemployed and part time workers that want to work full time hasn’t changed in a long time, according to the Labor Bureau—which is why economic growth is still stuck at 2 percent. Economists have yet to come up with a better answer, whereas many workers have answered such employers with their refusal to return to work.

Harlan Green © 2017


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Monday, August 7, 2017

Another Great Jobs Report?

Financial FAQs

No economist predicted another 209,000 private payroll jobs would be created in July, or that the last 2 months’ total would be 431,000, or the y-t-d total would be 1,290,000 payroll jobs created this year.

But they should have. The May JOLTS report was an indicator of higher employment numbers, as the unfilled jobs total dropped to 194,000 from 1 million the month before, for a total of 5.472 million hirings in May.


Job gains occurred in food services and drinking places, professional and business services, and health care. Employment growth has averaged 184,000 per month thus far this year, in line with the average monthly gain in 2016 (+187,000), said the Labor Bureau.

The only glitch, if that can be considered a problem, is that wages are still rising at 2.5 percent annually, which means two things. It means consumers won’t buy more than they are already buying, which would in turn increase demand and so increase economic growth, and there’s very little inflation, which means interest rates won’t be rising soon.

Wages aren’t rising faster because there are still many unemployed, or working part time when they would rather be working full time. “Both the unemployment rate, at 4.3 percent, and the number of unemployed persons, at 7.0 million, changed little in July. After declining earlier in the year, the unemployment rate has shown little movement in recent months,” said the BLS.

June’s Real Disposable Income was unchanged and May revised 1 tenth lower to a 0.3 percent gain, as I said in an earlier column. The real problem is weak wage growth, as most jobs being created are in low wage industries, like hospitality and even healthcare. Year-on-year, overall prices are up only 1.4 percent with the core little better at 1.5 percent.

Graph: Econoday

The 3 major employment sectors were Professional and Business Services, Healthcare, and Leisure and Hospitality as usual, all generally lower-paying job sectors.

Employment in food services and drinking places rose by 53,000 in July, said BLS. The industry has added 313,000 jobs over the year. Professional and business services added 49,000 jobs in July, in line with its average monthly job gain over the prior 12 months.

In July, health care employment increased by 39,000, with job gains occurring in ambulatory health care services (+30,000) and hospitals (+7,000). Health care has added 327,000 jobs over the past year.

What are those wages? In July, the BLS says, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $26.36. Over the year, average hourly earnings have risen by 65 cents, or 2.5 percent. In July, average hourly earnings of private-sector production and nonsupervisory employees increased by 6 cents to $22.10.

So the U.S. economy is in a bit of a bind, if it wants to grow faster. And that is a lack of population growth, one of two main drivers of GDP growth, when conservatives want to limit immigration?

The U.S. native population is barely growing, so where else are those workers coming from? And businesses are investing a bare minimum in capital expenditures, robots and other technologies that would increase productivity, the other driver of growth.

And then we have jumped off the Paris Accord bandwagon, when China is tripling its investments in alternative energy sources, such as wind and solar farms. That will also boost productivity and hence growth—for China and the rest of the world that isn’t ignoring climate change.

But conservative still have their heads stuck in coal mines, for some reason. Go figure. What century do they think we are living in?

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Tuesday, August 1, 2017

Great Q2 GDP Growth, But Q3?

Popular Economics Weekly

Second quarter GDP came in at a 2.6 percent annualized growth rate. This is one of the best showings of the last 2 years and keeps overall growth at 2 percent; because first quarter's growth was downwardly revised to 1.2 percent. And Q3 growth isn’t looking good, as June personal income and expenditures (PCE) just took a huge plunge—not a good omen for Q3.


June PCE income was unchanged and May revised 1 tenth lower to a 0.3 percent gain. Consumer spending was up 0.1 percent gain. Price data are flat, unchanged in the month with the core rate (less food and energy) up 0.1 percent for a second weak month in a row. The real problem is weak wage growth, as most jobs being created are in low wage industries, like hospitality and even healthcare. Year-on-year, overall prices are up only 1.4 percent with the core little better at 1.5 percent.

Graph: Econoday

What is wrong with the U.S. economy that it can’t grow faster? Nothing, really, given almost no productivity growth, and an aging population. This is maximum speed without an increase in productivity, in other words, and that won’t happen unless some of the $4.6T in deferred infrastructure spending gets done.

Can you imagine what new highways, bridges, airports, energy infrastructure, city and state water treatment facilities would do to productivity growth? Labor productivity rose at an average annual rate of 3-1/4 percent from 1948 to 1973, says the Federal Reserve, whereas, the average growth rate of productivity was about 1.7 percent in the period 1974 to 2016.
“If labor productivity grows an average of 2 percent per year,” said Fed Vice-Chair Stanley Fischer in a recent speech, “average living standards for our children's generation, will be twice what we experienced. If labor productivity grows an average of 1 percent per year, living standards will take two generations to double.”
“Governments can take sensible actions to promote more rapid productivity growth,” continued Fischer. “Broadly speaking, government policy works best when it can address a need that the private sector neglects, including investment in basic research, infrastructure, early childhood education, schooling, and public health.”
But construction spending also dropped in June—1.3 percent, mainly highways and streets in the government sector. Construction spending in manufacturing was also down. Doesn’t congress realize this is a sign that infrastructure expenditures are going down, rather than rising? This should be the priority, not attempting to repeal Obamacare, or cut taxes.

Our deficit problems would be solved if congress would focus on policies that really matter—like increasing spending on factors that enhance productivity, which would in turn increase GDP growth, which would in turn lower the budget deficit and obviate the need for draconian tax cuts.
“Reasonable people can disagree about the right way forward, but if we as a society are to succeed, we need to follow policies that will support and advance productivity growth. That is easier said than done. But it can be done,” says Fischer.
Economists such a Stanley Fischer know how this is done. In fact, we can only really survive as a viable democracy if we listen to the experts, rather than political ideologues.

Harlan Green © 2017


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